An Action Plan to Avert Another Economic Crisis

Edward J. Dodson

[Comments posted to a Youtube interview of Peter Schiff,
February 2015]

Peter Schiff is correct in his assertions, I believe. So, what should be done to at least mitigate the downturn that is on the horizon and set the stage for a job-creating economic expansion? There are policies that would achieve this outcome. Unfortunately, those who have long benefited by the system as it is possess enormous influence over our political process. We have become dominated by what Adam Smith would describe as a "rentier" elite; that is, a portion of our population with the power to claim a high proportion of what others produce without producing anything in exchange. In practical terms, our system of law and taxation has nurtured what economist Joseph Stiglitz has explained as "rent-seeking" speculation in land, natural resources and other land-like assets (e.g., the broadcast spectrum or even take-off and landing slots at airports). A small number of individuals and entities have gained control over assets that are provided to us by nature. The problem has been understood for centuries. Yet nothing has ever been done to end these monopolies. Winston Churchill famously declared during his 1909 campaign for a set in the House of Commons that monopolies were the enemy of democracy and that the monopoly in land was "the mother of all monopolies."

Thus, the first order of business to save our democracy and create an economic system that is truly based on fair competition is to change the way government raises its revenue. Our tax system must distinguish between income earned by producing goods or providing services and income gained by the mere holding of land and natural resources. As Adam Smith understood, every parcel of land in a city or town, every tract of land holding natural resources of any sort will yield an annual rent if offered for private use under competitive bidding. This rental value results from locational advantages, aggregate demand, population growth and aggregate investment in public and private amenities. The owner of land as owner creates no economic value. Value is created privately when labor and capital goods are applied to nature. Thus, the community should be collecting the full potential annual rental value of all land and stop taxing the assets we produce and the income we earn by that production.

Access to all public lands by private interests must be awarded under competitive bidding conditions, with the leasing fees (i.e., rent charges) adjusted frequently to reflect current market conditions. Today, most of this value is given away to companies that mine minerals, cut down timber, drill for oil and gas, establish solar and wind farms and control broadcast frequencies for television and radio, or the domain names on the internet. Economists who understand the nature of the issues estimate that "rent" from all these sources amounts to one-third of GDP.

Direct capture of rents will require changing laws at every level of government. The taxation of real estate is divided between municipalities, counties and school districts. The challenge of getting all of these taxing jurisdictions to change the way they raise revenue has proven to be impossible for advocates of the above reform measures.

It is possible for the states and federal government to collect rent-derived income by means of the income tax, if restructured to combine simplification with real progressivity. The starting point would be to exempt all individual incomes up to the median income in a state and at the federal level. All other deductions and exemptions would be eliminated. Then, above this level higher ranges of income would be taxed at an increasing rate of taxation. This structure would reward earned income and capture a high percentage of unearned (i.e., rent-derived) income. Most incomes above a few hundred thousand dollars a year are not spent but are "invested" in financial instruments. These investment reserves are sufficient to move markets for stocks and bonds but are not channeled with any effectiveness to job-creation. Capture of incomes at the highest level can provide the funds for repair of the nation's infrastructure -- its roads, bridges, schools, public transit systems, libraries and environmental remediation. These are certainly better uses of the funds than more conspicuous consumption.